D 

G6-3 


116 


GIFT  or 


1 


AFTER-WAR 
READJUSTMENT 


A.  C.  MILLER 


Published  by 
FEDERAL  RESERVE  BANK 

OF  SAN  FRANCISCO 


Digitized  by  the  Internet  Archive 

in  2008  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/afterwarreadjustOOmillrich 


Address 

By  K.  C.  Miller 


MEMBER 


^it'^ 


.  -.1.  i  . 


FEDERAL  RESERVE  BOARD      >i-»  ^  fe^<m»^>J«<J  ^ 

delivered  at  Philadelphia^ 

Saturday  evening,  December  21,  1918, 

before  the 

American  Academy  of  Political 

and  Social  Science 


PUBLISHED    BY 

FEDERAL  RESERVE  BANK 
OF  SAN  FRANCISCO 


i  ■ 


AFTER-WAR  READJUSTMENT 
RECTIFYING  THE  PRICE  SITUATION 

By  A.  C.  MILLER 

NOW  that  the  war  has  been  fought  and 
won  Svhat  next'  is  the  question  every- 
body is  asking  and  for  lack  of  some 
other  sounding  word  or  phrase,  nearly  every- 
body is  answering  ^reconstruction.'  It  is 
our  national  habit  when  we  have  to  move  on 
from  one  position  to  another  to  help  our- 
selves along  with  a  word  or  a  phrase;  so  it 
was  during  the  war,  when  we  heard  much  of 
'  unification, '  '  coordination, '  and  ^  conserva- 
tion.' Now  that  we  have  left  the  war  behind 
and  are  looking  forward  to  after-war  prob- 
lems, we  hear  much  of  ^reconstruction.'  We 
have  borrowed  the  word  from  Europe  where 
the  war  has  left  them  with  conditions  very  diff- 
erent from  those  obtaining  here.  It  is  just  as 
well  that  we  should  recognize  the  differences. 
The  war  has  left  us  with  some  difficult  financial 
and  economic  problems  but  it  has  not  left  us 

392625 


with  any  sucK  problems  of  reconstruction  as 
it  iias  Enrope,  unless  we  are  going  to  embark 
upon  the  venture  of  trying  to  ^make  the  world 
over. ' 

It  will  help  much,  I  believe,  to  put  us  in  the 
right  frame  of  mind  toward  our  after-war 
problems  if  we  substitute  for  the  word  're- 
construction' the  less  ambitious  but  neverthe- 
less suggestive  phrase  used  by  the  President 
the  other  day  in  his  address  to  Congress,  of 
'economic  and  industrial  readjustment.' 

Europe's  Problem:  RECONSTRrcTioN 

Contrast  for  a  moment  our  situation  with 
that  of  the  European  belligerents,  which  have 
had  four  years  of  war.  Sixty  millions  of  men 
at  one  time  or  another  have  been  drawn  to  the 
front.  Two  or  three  times  that  number  have 
been  drawn  into  work  so  closely  related  to 
operations  on  the  front  that  they  were  virtu- 
ally in  the  line  of  battle,  so  far  as  the  normal 
processes  of  economic  and  industrial  life  were 
concerned.  Ten  millions  have  been  killed, 
fifteen  or  more  millions  are  left  so  maimed 
and  diseased  that  they  will  be  of  doubtful  in- 
dustrial value,  unless  or  until  they  are  're- 

[6] 


constructed.'  These  killed  and  maimed  and 
diseased  represented  much  of  the  flower  of 
the  industrial  population  of  Europe.  They 
represent  a  heavy  and  grievous  loss  to  their 
countries'  industries.  Their  loss  must  some- 
how or  other  be  made  good  through  finding 
and  training  others  to  take  their  place.  Until 
this  is  accomplished,  the  industries  which  de- 
pended upon  their  skill  will  limp.  Here  is  a 
problem  of  reconstruction.  The  lands  in  many 
of  the  choicest  and  most  fertile  districts  of 
Europe  were  laid  waste  by  the  war;  farm- 
steads burned,  tools  and  live-stock  gone;  the 
very  soil  itself  destroyed.  Here  is  work  of 
veritable  reconstruction.  Factories,  mills  and 
foundries  in  France's  busiest  work-shop  dis- 
trict have  been  destroyed  or  so  badly  injured 
or  dismantled  that  much  must  be  done  before 
they  can  again  take  their  place  in  the  industry 
of  the  world.  Here  again  is  reconstruction. 
It  is  clear,  also,  that  much  work  must  be  done 
not  only  in  the  f  ought-over  and  devastated  dis- 
tricts of  Europe  to  repair  the  work  of  ravage 
and  destruction,  but  also  even  in  those  where 
the  sound  of  a  gun  was  never  heard.  There 
has  everywhere  in  Europe  been  such  deterior- 

[7] 


ation  of  industrial  equipment  through  en- 
forced neglect  of  upkeep  that  much  must  be 
done  before  factories  and  mills  are  gotten 
back  into  good  working  order  and  able  to 
turn  out  products  which  can  be  used  by  their 
own  people  or  sent  into  the  markets  of  the 
world  in  payment  of  needed  supplies  and 
materials.    This  also  means  reconstruction. 

America's  Problem:  Readjustment 

No  such  fundamental  economic  and  physi- 
cal problems  as  these  are  left  to  us  as  a  heri- 
tage of  war.  Our  situation  has  been  one  of 
comparative  immunity  and  safety.  Our  losses 
of  life  have  fortunately  been  few  and  our 
losses  of  property  negligible.  The  main  cost 
of  the  war  to  us,  apart  from  the  pecuniary 
cost  which  is  reckoned  in  the  amount  of  our 
national  war  debt  and  taxes,  is  to  be  found 
in  the  disorganization  of  industry  through 
the  necessary  shift  from  a  peace  basis  to  a 
war  basis.  It  has  been  estimated  that,  includ- 
ing the  men  who  went  into  the  armed  service, 
some  eighteen  million  persons  have  been  in- 
volved in  war  work  of  one  kind  or  another, 
mainly  in  industries  producing  for  the  sup- 

[8] 


port  of  our  armies  and  the  supply  of  our 
European  associates.  Some  of  these  and  in 
some  cases  many  will  have  to  be  shifted  from 
their  present  employments.  Places  will  also 
have  to  be  found  for  the  returning  soldiers. 
But  it  would  be  a  mistake  to  exaggerate  the 
extent  of  the  redistribution  of  the  labor  force 
of  the  country  that  will  be  thus  occasioned. 
It  must  not  be  overlooked  that  many  of  the 
basic  industries,  such  as  steel,  copper  and  the 
metal  trades  generally,  which  were  speeded 
up  or  enlarged  for  the  purposes  of  war  pro- 
duction, are  normally  very  large  industries 
and  it  is  altogether  probable  that  they  will 
remain  permanently  enlarged  to  meet  the 
heavy  after-war  demands  for  their  products 
and  that  consequently  many  of  those  who  first 
found  emplo5rment  in  these  industries,  as  a 
result  of  the  war,  will  remain  with  them.  At 
the  most,  taking  the  situation  by  and  large, 
our  after- war  conditions  will  present  a  prob- 
lem of  reemployment,  or,  reorganization, 
rather  than  a  problem  of  reconstruction.  It 
is  a  problem  that  we  may  well  believe  will 
find  its  own  solution  in  due  course — indeed 
is  already  finding  its  solution — if  the  process 

[9] 


of  economic  and  industrial  readjustment  is 
kept  measurably  free  from  unnecessary  inter- 
ference on  the  part  of  the  Government,  and 
if  good  temper,  forbearance,  and  a  spirit  of 
accommodation  are  shown  by  all  interests  dur- 
ing the  period  of  transition.  Government  help 
there  may  have  to  be  in  stabilizing  industrial 
conditions  from  time  to  time  through  employ- 
ment on  public  works,  but  the  intervention 
of  the  Government  should  be  by  way  of  sup- 
plement to,  rather  than  substitute  for,  normal 
business  agencies.  The  problem  is  mainly  a 
business  problem  to  be  handled  by  business 
men. 

ErROPE's  Economic  and  Financial  Need 

It  is  even  likely  that  in  Europe  the  process 
of  reconstruction  and  recuperation  will  be 
speedier  and  more  complete  than  many  now 
fear.  The  parts  of  Europe  that  have  borne 
the  brunt  of  the  war  are  those  whose  people 
are  possessed  of  the  greatest  economic  capa- 
city— energy,  ambition,  inventiveness  and  de- 
termination. They  are  impatient  to  wipe  out 
the  traces  of  war  and  get  themselves  back 
into  working  order.   Much  assistance  will  be 

[10] 


needed  by  them  from  the  outside  world  in  the 
first  steps  of  the  process  and  that  means 
chiefly  from  us.  But  with  that  assistance,  the 
repair  of  waste  and  the  accumulation  of  new 
capital  may  be  expected  to  go  forward  rapidly 
in  Europe  in  the  next  few  years.  Indeed  the 
rapidity  of  Europe's  industrial  recovery  is 
likely  to  be  one  of  the  economic  marvels  of  all 
time. 

Europe  will  need  goods  and  credit  from  us 
if  she  can  get  them  on  a  reasonable  basis.  The 
goods  she  will  need  are  mainly  food-stuffs, 
raw  materials  of  industry  and  the  basic  ma- 
terials of  construction.  Provided  she  can  get 
these  at  reasonable  prices,  she  will  take  them 
in  large  amounts,  and  trade  and  industry  may 
be  expected  to  be  active  in  the  United  States 
for  a  few  years  and  our  problem  of  economic 
and  industrial  readjustment  may  be  expected 
to  find  much  of  its  solution  in  this  way. 

The  credits  Europe  will  need  will  be  both 
short-term  or  commercial  and  long-term  or 
investment.  The  former  we  can  easily  pro- 
vide through  the  further  development  of  ac- 
ceptance credits  and  the  aid  of  the  Federal 
Reserve    Bank.     Long-term    or    investment 

[11] 


credits  present  a  different  problem;  they  call 
for  capital  and  capital  must  first  be  accumu- 
lated or  saved  before  it  can  be  loaned  or  in- 
vested. It  may  confidently  be  expected,  how- 
ever, that  if  Europe  finds  in  the  American 
market  the  goods  it  needs  at  reasonable  prices, 
ways  will  be  found  of  financing  the  purchases 
and  investments  with  the  aid  of  our  bankers 
and  the  investing  public.  The  main  pivot  of 
the  after-war  economic  situation,  particularly 
in  its  international  aspects,  is  prices.  Europe 
cannot  afford  to  buy  much  from  us  on  the 
basis  of  present  war  prices  without  endanger- 
ing her  economic  solvency  and  it  may  well  be 
doubted  whether  it  will  be  to  our  permanent 
interest,  if  we  undertake  to  finance  her  re- 
construction, to  encourage  her  to  buy  much 
at  war  prices  if  her  solvency  is  thereby 
threatened.  Much  will,  therefore,  depend, 
both  for  us  and  Europe,  on  the  course  that 
prices  take  during  the  coming  months  and 
years  as  to  whether  the  period  of  transition, 
readjustment  or  reconstruction,  whichever  it 
may  be,  is  to  be  a  short  and  satisfactory  one 
or  a  long  and  wearing  one. 

[12] 


The  Price  Situation 

Of  all  the  financial  difficulties  confronting 
the  country  at  the  close  of  the  war  the  price 
situation  is,  in  a  business  way,  the  most  seri- 
ous and  the  one  calling  for  the  most  immediate 
correction.  Fortunately  for  the  United  States, 
this  situation  is  not  confined  to  us.  The  whole 
commercial  world  has  been  involved  in  a  series 
of  extraordinary  price  disturbances  growing 
out  of  the  war.  While  the  situation  is  worse 
in  some  countries  than  in  others,  it  is  serious 
in  all.  The  general  dimensions  and  the  gravity 
of  it  are  sufficiently  disclosed  in  the  broad 
statement  that,  in  the  course  of  the  four  years 
of  war,  the  world  level  of  prices  has  risen 
by  one  hundred  per  cent.  In  some  countries 
prices  mean  depreciated  paper  prices,  in 
others  gold  prices,  but  in  all  an  increase  has 
been  experienced  that  makes  the  problem  of 
price  rectification  one  of  urgency  everywhere. 

It  cannot  be  emphasized  too  insistently  that 
economic  life  can  never  be  normal  and  that 
business  conditions  can  never  be  safe,  until 
prices  in  leading  world  markets  work  their 
way  back  to  some  sort  of  a  stable  or  normal 
level  adjusted  to  conditions  of  national  and 

[13] 


international  demand  and  supply,  as  these 
will  be  when  industry  and  trade  among  the 
nations  have  recovered  from  the  shattering 
effects  of  the  war  and  have  resumed  some- 
thing that  can  be  called  a  normal  course.  How 
quickly  this  process  will  be  worked  out  will 
determine  how  long  the  world  will  be  in  the 
uncertainties  and  difficulties  of  a  period  of 
transition.  Periods  of  transition  are  always 
periods  of  strain.  To  shorten  them  by  such 
means  as  can  be  foreseen  to  have  a  desirable 
effect  is  the  part  of  good  economic  and  finan- 
cial policy,  both  for  the  individual  business 
man  and  for  the  nation  and  the  commercial 
world  at  large. 

There  is  already  much  welcome  indication 
that  the  more  foresighted  of  the  American 
business  community  are  looking  ahead  to  the 
falling  of  prices  as  something  that  is  inevit- 
able in  the  normal  course  and,  instead  of  wait- 
ing, are  anticipating  and  assisting  the  process 
of  readjustment  by  voluntary  price  reduc- 
tions. Such  was  the  action  recently  taken  by 
the  steel  trade,  the  greatest  of  the  country's 
barometers  of  industry,  an  action  that  is 
bound  to  have  a  decisive  effect  in  many  re- 

[14] 


lated  fields.  Many  merchandising  establish- 
ments, also,  are  looking  ahead  and  taking 
such  precautionary  measures  as  they  can  to 
prevent  being  involved  in  avoidable  loss  in 
the  transitional  period  of  price  readjustment. 
Bankers  are  scrutinizing  credit  statements 
and  are  advising  clients  to  be  careful  not  to 
be  caught  with  large  inventories  on  a  falling 
market  and  the  advice  meets  many  prepared 
minds  and  much  ready  acceptance. 

Such  mental  preparation  paves  the  way 
and  thereby  hastens  and  makes  safe  the  pro- 
cess of  price  readjustment.  But  when  all  is 
done  in  this  way  that  can  reasonably  be  ex- 
pected of  the  business  man,  it  will  still  remain 
true  that  much  of  the  readjustment  of  prices 
must  come  about  through  other  action  in 
which  the  community  at  large  must  have  a 
principal  part. 

What  is  it  that  has  driven  prices  to  the 
dizzy  heights  that  have  prevailed  during  the 
past  four  years?  In  general,  the  answer  of 
course  must  be  war — the  economic  and  finan- 
cial disturbances  the  war  has  produced.  It  is 
difficult  enough,  even  under  normal  condi- 
tions, to  specify  the  factors  which  determine 

[15] 


the  level  of  prices.  The  price  situation,  as  we 
find  it  in  any  given  country  at  any  given  time, 
is  the  result  of  a  complexity  of  forces  in  which 
the  production  and  costs  of  goods,  market 
demands,  the  saving  and  investment  of  cap- 
ital, the  state  of  credit,  and  the  volume  of 
money  and  currency,  all  have  their  measure 
of  influence.  These  have  all  been  at  work  dur- 
ing the  war,  but  they  have  been  so  complicated 
in  their  action  by  the  war  that  no  simple  ex- 
planation of  the  movement  of  prices  in  our 
own  or  other  countries  is  adequate  fully  to 
explain  the  causes  of  what  has  been  taking 

^       '      Scarcity  and  High  Prices 

From  the  very  beginning,  the  war  caused 
a  great  intensification  of  the  demand  for  a 
great  variety  of  materials  and  supplies  needed 
in  modern  warfare.  With  all  the  efforts  that 
have  been  made  to  adjust  the  productive  or- 
ganization of  the  different  countries  to  the 
supply  of  these  much-needed  things,  there 
has,  until  quite  recently,  been  a  relative  short- 
age of  many  of  the  primary  materials  and 
basic  commodities  of  war.  To  that  extent, 
they  have  commanded  ^scarcity  values'  and 

[16] 


their  prices  would  have  ruled  high  even  had 
there  been  no  alteration  in  general  monetary 
conditions.  Much  patient  and  methodical  sta- 
tistical investigation  will  be  needed  to  deter- 
mine the  exact  extent  to  which  high  prices 
during  the  past  four  years  can  properly  be 
regarded  as  'scarcity  values.' 

To  the  extent  that  the  prevailing  high 
prices  have  been  'scarcity  values'  we  may  ex- 
pect the  situation  to  right  itself  in  due  time  as 
industry  shifts  from  war  production  to  peace 
production  and  the  vast  numbers  of  able- 
bodied  workers,  who  have  been  withdrawn 
from  productive  industry  to  military  service, 
are  reinstated  in  the  industrial  army  of  the 
country.  The  production  of  many  basic  ma- 
terials and  commodities,  which  have  been  in 
short  supply,  will  gradually  catch  up  with  the 
demand  and  values  be  brought  back  more 
nearly  to  normal.  This  movement  has  already 
begun. 

Looked  at  from  this  point  of  view,  the  prob- 
lem of  reestablishing  a  normal  price  level  is 
a  problem  in  production^  one  to  be  worked 
out  in  factory,  farm  and  work-shop.  Prices 
will  move  toward  normal  and  goods  will  be- 

[17] 


come  cheaper  as  they  become  more  abundant. 
They  will  become  more  abundant  as  the  waste- 
ful processes  of  war  consumption  come  to  an 
end  and  production  resumes  its  normal  ways. 

Inflation  and  High  Pkices 

But  ^scarcity'  is  a  relative  term  and  there 
is  so  much  evidence  of  an  artificial  abundance 
of  money  in  comparison  with  the  things  that 
are  purchasable  by  it  that  the  abundance  of 
money  must  be  credited  with  at  least  an  equal 
influence  in  explaining  the  high  prices  which 
have  prevailed.  Special  attention  will,  there- 
fore, have  to  be  directed  in  the  process  of  a 
return  to  a  normal  basis  of  prices  to  the  con- 
dition of  banking  credit  and  currency,  which 
has  promoted  or  sustained  the  upward  flight 
of  prices. 

The  balance  sheet  of  the  belligerent  world 
has  been  swollen  by  the  addition  of  about  two 
hundred  billions  of  public  debt  on  the  liabili- 
ties side  of  the  account  with  only  partial  off- 
sets in  the  way  of  newly  created  wealth  on  the 
assets  side  of  the  statement  to  insure  economic 
solvency  among  the  European  belligerents 
and  especially  the  Central  Powers.    Not  the 

[18] 


least  of  the  wonders  worked  by  the  war  has 
been  the  ease  with  which  vast  public  debts 
have  been  contracted,  on  what  must  be  con- 
sidered a  relatively  favorable  basis,  so  far  as 
concerns  interest  rate  and  other  terms. 

The  fact  that  the  war  was  not  merely  or 
mainly  a  war  of  armies  but  a  war  of  nations 
in  which  everybody  had  his  part  to  play  does 
much  to  explain  the  unprecedented  financial 
achievement  of  all  the  belligerent  nations. 
Patriotism  may  have  run  as  high  in  other 
wars  but  never  before  did  it  so  nearly  embrace 
whole  communities  to  the  last  individual  in 
its  magnificent  sweep.  It  has  become  a  matter 
of  commonplace  observation  in  the  United 
States  that  our  people  of  many  different  races, 
creeds  and  conditions  have  never  before  been 
so  nearly  one  in  thought,  feeling,  spirit,  pur- 
pose and  action,  as  during  the  war.  All  of  the 
four  great  Liberty  Loans  have  given  the  evi- 
dence and  measure  of  the  people's  devotion 
to  the  Nation's  cause.  Twenty-one  million 
subscribers  to  the  Fourth  Liberty  Loan  tells 
much  of  the  story  of  our  financial  achieve- 
ment. Much,  but  not  quite  all !  For  the  achieve- 
ment is  not  quite  all  that  it  appears  to  be  and 

[19] 


must  become.  The  rest  of  the  story  will  be 
found  in  the  expanded  condition  of  the  banks. 
Of  the  eighteen  and  a  half  billions  of  loans 
thus  far  put  out  by  the  Government,  it 
may  be  estimated  that  six  billions  are  being 
carried  by  or  in  the  banks.  To  the  extent 
that  subscriptions  to  Government  borrowings 
are  paid,  not  out  of  cash  which  the  subscriber 
has  actually  saved  out  of  his  income,  but  by 
credit  borrowed  from  his  bank,  the  payment 
of  the  subscription  must  be  regarded  as  hav- 
ing given  rise  to  an  expansion  of  bank  credit 
to  approximately  an  identical  amount.  Such 
expansion  of  credit,  unless  it  sets  in  motion 
new  forces  of  saving,  results  in  inflation,  first, 
of  credit,  then,  of  currency,  and,  as  a  con- 
sequence of  both,  inflation  of  prices.  A  bank's 
deposits  and  currency  are  the  children  of  its 
loans  and  investments.  When  the  loans  and 
investments,  therefore,  which  occasion  an  in- 
crease of  deposits  and  currency  are  not  defin- 
itely tied  to  the  production  or  saving  of  goods, 
they  must  cause  a  rise  of  prices.  When  the 
rise  of  prices  resulting  from  an  expansion  of 
credit  and  currency  is  not  able,  or  until  it  is 
able,  to  induce  a  commensurate  increase  of 

[20] 


productive  industry  to  match  the  increased 
buying  power  of  the  community,  the  resulting 
condition  is  one  of  inflation,  that  is  one  in 
which  there  is  more  purchasing  power,  in 
terms  of  money,  afloat  in  the  community  than 
is  called  for. 

This  condition  has  not  been  peculiar  to  the 
United  States.  Credit  expansion  and  currency 
expansion — inflation,  for  short — ^have  every- 
where played  their  part  in  the  financing  of 
the  war;  not  as  much  fortunately  in  the 
United  States  as  in  other  countries,  but  yet 
enough  to  cause  concern;  not  disastrously  as 
in  former  wars,  but  not  without  producing 
some  serious  consequences  and  leaving  in  some 
of  the  belligerent  countries  grave  dangers  and 
in  all  of  them,  ourselves  included,  a  trouble- 
some after-war  situation.  The  great  central 
note-issuing  banks  of  the  modern  world — 
such  are  also  our  Federal  Reserve  Banks — 
have  made  inflation  easy.  In  the  estimation 
of  many  they  have  also  made  it  safe.  They 
certainly  have  done  much  to  make  it  technic- 
ally  safe.  The  theory  upon  which  the  great 
note-issuing  banks  pretty  generally  have  pro- 
ceeded is  that  the  test  of  banking  safety  is  to 

[21] 


be  found  in  the  reserve  ratio.  The  more  gold, 
the  more  credit  and  currency.  Such  appears 
to  have  been  their  monetary  logic.  Acting 
upon  this  theory,  they  have  scoured  their  re- 
spective countries  of  most  of  the  scattered 
gold. 

^Goods'  Value  Versus  ^Gold'  Value 

As  long,  therefore,  as  the  great  central 
banks  could  gather  in  gold  enough  to  main- 
tain a  suitable  mixture  of  gold  in  their  re- 
sources and  thus  clothe  their  liabilities  with 
a  suitable  covering  of  gold,  their  position  was 
one  of  technical  safety  and  appearances  were 
good.  It  may  be  admitted  that  appearances 
count  for  much  in  the  psychology  of  credit 
and  banking.  But  more  than  appearances 
and  more  than  technical  safety  and,  there- 
fore, more  than  gold,  are  necessary  to  the 
good  functioning  of  reserve  and  note-issuing 
institutions.  The  character  of  their  general 
assets,  as  well  as  the  adequacy  of  their  re- 
serves, determines  their  real  condition.  There 
must  be  wisdom — great  wisdom  and,  at  times, 
courage,  as  well  as  wisdom — ^in  the  adminis- 
tration   of    note-issuing    and    reserve    credit 

[22] 


banks  if  more  than  a  condition  of  technical 
banking  strength  is  to  be  maintained  and  the 
world  made  safe  against  the  costly  evils  of 
inflation.  That  lesson  the  world  is  about  to 
learn  as  a  result  of  the  experiences  of  the  past 
four  years.  Until  it  is  learned  and  the  credit 
and  currency  situations  in  the  leading  coun- 
tries rectified  accordingly,  the  business  of  the 
world  will  be  in  a  state  of  maladjustment  with 
the  industrial  unrest  and  strife  that  are 
usually  bred  of  maladjustment  and  financial 
confusion. 

The  fact  that  inflation  in  the  United  States 
has  not  been  caused  or  attended  by  suspension 
of  gold  payments  or  a  discount  on  paper  cur- 
rency, such  as  was  experienced  during  the 
Civil  War,  should  not  blind  us  to  the  realities 
of  the  situation.  Suspension  of  specie  pay- 
ments may  take  place  without  producing  a 
state  of  inflation.  (Such  was  the  case  in 
France  during  the  Franco-German  War  of 
1870-71,  when  the  Bank  of  France  suspended 
specie  payments  but  managed  its  note  issues 
with  such  care  that  they  were  never  at  any 
time  over-issued  and  never  went  to  anything 

[23] 


more  than  a  nominal  discount  as  compared 
with  gold.) 

Recent  events,  particularly  in  the  United 
States  and  among  the  northern  neutrals  of 
Europe,  which  like  the  United  States  have 
experienced  enormous  accessions  to  their  sup- 
plies of  gold  during  the  period  of  the  war, 
show  that  inflation  may  take  place  without 
a  suspension  of  specie  payments  or  the  oc- 
currence of  a  discount  on  paper.  It  was  the 
very  abundance  of  gold  that  helped  to  advance 
prices  in  the  United  States  before  our  entry 
into  the  war.  The  currency  of  the  United 
States  now,  as  then,  is  a  gold  currency.  Prices 
in  the  United  States  are,  therefore,  gold 
prices.  This  fact  is  incontestable.  There  is  gold 
enough  and  more  than  enough  to  assure  the  ab- 
solute convertibility  of  our  paper  currency 
in  gold.  The  trouble  with  our  situation  is  not 
that  the  paper  dollar  is  not  as  good  as  the  gold 
dollar;  just  the  reverse  is  true:  it  is.  The 
trouble  with  our  situation  is  that  neither  the 
paper  dollar  nor  the  gold  dollar  will  buy  as 
much  as  they  did  before  inflation  of  prices 
began.  At  prices  as  they  are,  the  paper  dollar 
buys  as  much  as  the  gold  dollar.    The  gold 

[24] 


dollar  is  no  better  than  the  paper  dollar.  The 
two  are  interchangeable.  Our  trouble,  there- 
fore, is  with  dollars,  irrespective  of  their 
kind.  It  is  one  of  quantity^  not  of  quality,  or, 
at  any  rate,  not  of  quality  in  terms  of  gold. 
Our  elastic  note  issue  system  has  enabled  us 
to  place  the  issue  of  paper  dollars  on  a  quan- 
tity basis  without  endangering  the  integrity  of 
their  gold  value.  The  trouble  is  with  the  goods 
value,  not  with  the  gold  value  of  the  American 
dollar.  Our  difficulty  is,  and  therein  consists 
our  inflation,  that  dollars — good  financial  dol- 
lars, ^safe'  dollars,  gold  dollars — ^have  been 
created  in  such  abundance  in  comparison  with 
the  amount  of  goods  purchasable  by  them  that 
they  have,  as  a  necessary  result,  lost  in  their 
purchasing  power — in  other  words,  the  sup- 
ply of  money  has  become  disproportionate  to 
the  supply  of  goods  with  rising  prices  as  the 
inevitable  result. 

Since  the  beginning  of  the  European  War 
or  between  the  dates  of  July  1,  1914  and  Sep- 
tember 1,  1918,  the  total  money  in  circulation 
in  the  United  States,  as  shown  by  the  Treas- 
ury statement,  increased  from  $3,402,015,000 
to  $5,621,311,000,  an  increase  of  $2,219,296,000 

[25] 


or  65  per  cent.  Total  deposits  of  all  banks,* 
between  the  dates  of  June  30,  1914,  and  June 
29,  1918,  the  latest  date  for  which  complete 
figures  are  available,  increased  from  $21,279,- 
000,000  to  $32,589,000,000,  an  increase  of 
$11,310,000,000  or  53  per  cent.  Loans  and 
discounts  for  the  same  dates  show  an  increase 
from  $15,340,000,000  to  $22,059,000,000,  or 
$6,719,000,000,  an  increase  of  44  per  cent. 
Total  investments  for  the  same  dates  show  an 
increase  from  $20,924,000,000  to  $31,982,000,- 
000  or  $11,058,000,000,  an  increase  of  53  per 
cent. 

Since  our  entry  into  the  war,  or  between  the 
dates  of  July,  1, 1917  and  July  1, 1918,  the  total 
money  in  circulation  in  the  United  States,  as 
shown  by  the  Treasury  statement,  increased 
from  $4,850,360,000  to  $5,621,311,000,  an  in- 
crease of  $770,951,000  or  16  per  cent.  Total 
deposits  of  all  banks,*  between  the  dates  of 
June  20,  1917  and  June  29,  1918,  the  latest 
date  for  which  complete  figures  are  available, 
increased  from  $30,443,000,000  to  $32,589,000,- 
000  an  increase  of  $2,146,000,000  or  7  per 
cent.  Loans  and  discounts  for  the  same  dates 

*National,  State  and  private  banks  and  loan  and  trust  com- 
panies. 

[26] 


show  an  increase  from  $20,502,000,000  to 
$22,059,000,000  or  $1,557,000,000,  an  increase 
of  8  per  cent.  Total  investments  for  the  same 
dates  show  an  increase  from  $28,611,000,000 
to  $31,982,000,000,  or  $3,371,000,000,  an  in- 
crease of  12  per  cent. 

The  index  munber  of  wholesale  prices  in  the 
United  States  computed  by  the  Bureau  of 
Labor  Statistics  shows  a  rise  from  98  in  June, 
1914,  to  202  in  August,  1918,  a  rise  of  over 
100  per  cent.  The  index  number  for  retail 
prices  for  the  same  dates  moved  from  99  to 
171,  an  increase  of  about  73  per  cent.  Since 
the  entry  of  the  United  States  into  the  war, 
the  index  number  of  wholesale  prices  has 
risen  from  171  in  April,  1917,  to  202  in  Aug- 
ust, 1918,  an  increase  of  18  per  cent,  the  index 
number  for  retail  prices  for  the  same  dates 
having  moved  from  145  to  171,  an  increase  of 
18  per  cent. 

These  figures  certainly  reveal  a  very  con- 
siderable increase  in  the  volume  of  banking 
operations  in  the  United  States  since  the  be- 
ginning of  the  European  War  in  1914.  An 
aggregate  of  probably  over  ten  billions  (an 
increase  of  about  50  per  cent)  of  new  pur- 

[27] 


chasing  power  since  the  beginning  of  the 
European  War,  mainly  in  the  form  of  bank 
deposit-currency,  has  come  into  existence  dur- 
ing this  period.  The  portion  of  this  increase, 
which  is  to  be  charged  to  the  period  beginning 
with  our  entry  into  the  war,  cannot  be  ac- 
curately determined  for  lack  of  adequate  data. 
But  an  indication  is  supplied  by  the  increase 
between  the  dates  of  June  20,  1917  and  June 
29,  1918  noted  above,  in  the  figures  for  total 
deposits  and  money  in  circulation,  an  increase 
of  the  two  together  of  8  per  cent.  It  seems 
within  the  probabilities  that,  of  the  ten  bil- 
lions of  new  purchasing  power  which  there  is 
good  ground  for  believing  have  been  created 
in  the  United  States  since  July,  1914,  a  fourth 
may  conservatively  be  regarded  as  chargeable 
to  the  period  since  our  entry  into  the  war. 

To  the  extent  that  this  increase  in  the  sup- 
ply of  the  purchasing  media  of  the  country 
has  not  been  offset  by  a  like  increase  in  the 
production  of  goods,  it  must  be  regarded  as 
unnecessary  and  superfluous  from  the  eco- 
nomic point  of  view,  whatever  may  be  said  in 
justification  of  it  from  the  point  of  view  of 
political  and  general  financial  expediency.  To 

[28] 


the  extent  that  it  has  been  offset  by  increased 
production,  it  presents  no  difficulty.  That 
there  has  been  an  enormous  increase  in  the 
physical  output  of  goods  in  the  United  States 
during  the  past  four  years  cannot  be  ques- 
tioned. Never  before  has  the  country  come 
so  near  to  realizing  its  full  productive  capa- 
city; never  before  has  there  been  so  little  un- 
employment or  idleness.  Some  estimates 
place  the  increase  in  the  physical  products 
of  the  country  during  the  past  four  years 
as  high  as  25  per  cent.  If  we  take  a  more 
conservative  figure,  of  20  per  cent,  it  would 
suggest  the  inference  that  a  commensurate 
proportion  of  the  volume  of  credit  and 
currency  existing  in  1914,  or  some  4  bil- 
lions of  dollars  in  the  aggregate,  was  prob- 
ably legitimately  called  for  by  the  growth 
of  production  in  the  past  four  years. 

In  estimating  the  amount  of  credit  and  cur- 
rency contraction  that  will  have  to  take  place 
before  our  price  situation  can  be  regarded  as 
in  a  fair  way  to  become  normal,  these  4  bil- 
lions should  properly  be  deducted  from  the 
statement  of  the  present  volume  of  these 
items.    It  would  appear  probable,  therefore, 

[29] 


that  some  6  billions  of  credit  and  currency 
in  the  aggregate  have  been  created  in  the  past 
4^  years  that  cannot  be  regarded  as  having 
been  occasioned  by  the  requirements  of  in- 
dustrial growth,  as  measured  in  terms  of 
physical  units.  This  is  also  approximately  the 
amount  of  war  securities  and  war  loan  paper, 
as  has  already  been  stated,  that  the  banking 
system  of  the  United  States  is  today  carrying. 
To  this  extent  the  expansion  of  banking  credit 
and  currency  would  appear  to  have  been 
occasioned  by  the  banks  having  assumed 
the  burden  of  assisting  the  placement  of 
Treasury  borrowings  by  the  extension,  use 
and  lending  of  their  credit.  Such  use  of  credit 
is  almost  of  necessity  inflationary  in  its  im- 
mediate effects  and  in  its  continuing  tenden- 
cies until  corrected. 

Eectification  of  the  Price  Sitijation 

There  can  be  little  question  what  form  the 
correction  should  take.  Where  there  has  been 
inflation^  there  must  follow  deflation,  as  a 
necessary  condition  to  the  restoration  of  eco- 
nomic health.  Contraction  of  bank  deposits 
and  currency,  through  the  liquidation  of  war 

[30] 


loan  accounts,  is  clearly  indicated  as  the  next 
and  necessary  step  in  the  process  of  bringing 
the  credit  currency  and  price  situation  back 
to  normal.  Those  who,  in  our  Liberty  Loan 
campaigns,  were  persuaded  to  borrow  and  buy 
must  now  be  made  to  save  and  pay.  ^Save 
and  pay  up'  should  henceforth  be  our  slogan. 
The  problem  of  correcting  a  state  of  banking 
inflation  is  mainly  a  problem  in  saving.  We 
must  either  put  more  goods  behind  the  out- 
standing voliune  of  credit  and  currency — ^that 
means  production — or  we  must  reduce  the 
volume  of  credit  and  currency  to  suitable  pro- 
portions— that  means  saving. 

Expenses  and  spending  must  be  kept  down ; 
money  must  be  saved.  As  it  is  saved,  it  must 
be  paid  to  the  banks  in  liquidation  of  war 
loans  and  other  non-productive  borrowings. 
If  the  money  saved  is  in  the  form  of  deposit 
or  checking  credits,  then  the  total  volume  of 
these  in  existence  and  in  use  will  be  dimin- 
ished as  they  are  used  to  cancel  an  equivalent 
amount  of  loans  and  thus  will  the  banking 
structure  be  contracted  and  prices  be  rectified. 
If  in  the  form  of  bank  notes,  the  cash  hold- 
ings of  the  banks  will  be  built  up  and  they 

[31] 


will  be  enabled  to  reduce  their  borrowings 
from  their  Eeserve  Banks  and,  in  this  wise, 
the  notes  will  find  their  way  back  to  the  Re- 
serve Banks,  reducing  at  once  the  volume  of 
their  outstanding  note  liabilities  on  the  one 
side  and  their  holdings  of  bills  discounted  on 
the  other.  Thus  will  saving  effect  the  reduc- 
tion in  the  volume  of  outstanding  currency 
and  credit.  There  is  no  escape  from  this  nec- 
essity. As  long  as  inflation  exists,  the  nation 
must  continue  to  practice  thrift.  Only  thus 
can  the  capital  be  created  and  supplied  which 
will  wipe  out  the  inflation  that  already  exists 
and  avoid  or  minimize  such  new  inflation  as 
may  threaten  in  connection  with  the  great 
borrowings  that  must  still  be  made  for  the 
use  of  our  Government  and  the  Governments 
associated  with  it,  to  say  nothing  of  the  large 
demands  for  capital  that  will  be  made  on  the 
American  investment  market  by  Europe  in 
the  process  of  reestablishing  her  industries. 

The  Government's  requirements  for  the  re- 
mainder of  the  fiscal  year  have  been  stated 
as  likely  to  be  not  less  than  seven  billions. 
This  amount,  added  to  the  six  billions  of  out- 
standing war  securities  which,  it  is  estimated 

[32] 


above,  have  not  yet  been  permanently  ab- 
sorbed, gives  us  a  total  of  thirteen  billions  of 
public  securities  which  must  be  taken  up  out 
of  genuine  savings  if  our  financial  and  credit 
system  is  to  be  sterilized  of  the  taint  of  in- 
flation which  at  present  is  upon  it.  When  this 
is  accomplished,  prices  are  likely  to  be  at 
something  that  can  be  regarded  as  a  normal 
level.  Until  it  is  accomplished,  there  will  be 
an  imstable  price  situation.  As  it  is  gradually 
accomplished,  prices  will  go  back  to  a  normal 
basis  in  an  orderly  manner.  But  if  a  con- 
siderable part  of  the  new  borrowings,  which 
the  Government  must  make  during  the  fiscal 
year  and  until  war  accounts  are  finally  closed 
up,  are  financed  by  any  considerable  expan- 
sion of  banking  credit,  we  are  likely  to  have 
more  inflation  and  an  aggravation  of  a  price 
situation  which  is  already  sufficiently  serious 
and  burdensome. 

Replenishing  Capital 

Europe's  post-war  financial  and  industrial 
requirements  cannot  even  be  conjectured.  But 
they  are  likely  to  be  very  considerable  if,  as 
has   already   been   suggested,   goods   can   be 

[33] 


bought  in  the  American  market  at  reasonable 
prices  and  capital  obtained  on  reasonable 
terms.  The  destruction,  waste  and  deteriora- 
tion of  plant  facilities  and  other  industrial 
equipment  must  amount  to  an  aggregate,  tak- 
ing all  of  the  European  belligerents  together, 
that  it  will  take  some  billions  of  dollars  worth 
of  materials  and  supplies  to  replace  or  repair. 
The  amount  in  which  Europe  is  indebted  to 
the  United  States  on  the  financial  account  be- 
cause of  the  heavy  borrowings  that  have  been 
made  in  the  American  market  the  past  three 
years,  will  probably  be  not  far  from  five  hun- 
dred millions  of  dollars  for  interest  alone 
when  peace  is  established.  Europe  could  prob- 
ably use  to  good  advantage  two  or  three  times 
this  amount  in  the  process  of  replenishing  her 
capital  during  the  next  two  or  three  years,  if 
conditions  generally  were  favorable.  It  may 
be  expected,  therefore,  that  capital  will  be  in 
strong  demand  in  the  post-war  period  and 
that  much  financing  of  an  investment  charac- 
ter will  have  to  be  undertaken  by  America  in 
the  process  of  helping  the  reconstruction  of 
Europe  and  the  reestablishment  of  normal 
conditions  throughout  the  world.    The  situa- 

[34] 


tion  presents  a  duty  to  be  undertaken  by  the 
people  of  the  United  States,  as  well  as  an 
opportunity  to  be  embraced.  Investment  rates 
of  interest  are  likely  to  rule  high  for  some 
years  and  to  make  saving  a  remunerative  sac- 
rifice. There  is  no  method  by  which  capital 
can  be  created  except  by  saving — ^by  saving 
productive  power  from  the  production  of 
goods  destined  for  immediate  consumption  to 
the  production  of  goods  destined  for  capital 
equipment.  It  is  essential  from  every  point 
of  view  that  the  depleted  capital  of  the  bellig- 
erent countries  shall  be  restored  and  the  ter- 
rible gap  torn  in  the  industrial  structure  of 
Europe  by  four  years  of  war,  filled  up.  Just 
as  the  war  taught  us  to  draw  with  closer  ap- 
proximation and  finer  appreciation  a  line  be- 
tween industries  and  goods  according  to  their 
bearing  on  the  prosecution  of  the  war — the 
^essentials'  being  those  that  helped,  the  ^non- 
essentiaJs'  those  that  delayed  or  hindered — 
so  the  same  principle,  in  view  of  the  urgent 
economic  condition  with  which  the  war  has 
left  the  belligerent  countries,  suggests  an 
analogous  application  of  the  same  principle 
— after- war  essentials  being  those  that  helped 

[35] 


industrial  recuperation,  the  nonessentials 
those  that  hinder  or  delay.  The  consumption 
and,  therefore,  the  production  of  nonessen- 
tials must  be  kept  down  in  order  that  the  pro- 
duction of  the  new  essentials  may  go  forward 
at  prices  that  will  attract  demand. 

Europe  cannot  afford  to  buy  great  quan- 
tities of  goods  in  the  American  market,  urgent 
as  its  need  is  for  materials  of  post-war  indus- 
trial reconstruction,  unless  our  prices  fall,  no 
matter  how  ready  we  stand  to  finance  them, 
because  Europe  cannot  afford  to  handicap 
her  reconstructed  industries  with  a  capitali- 
zation that  will  not  be  warranted  by  earnings 
when  post-war  prices  get  back  to  normal,  as 
sooner  or  later  they  will.  For  her  industries 
to  do  otherwise  would  be  to  invite  serious 
losses  and  possible  bankruptcies. 

Indeed,  much  the  same  may  be  said  of  our 
own  domestic  business  situation.  Increase  of 
the  capital  account  will,  in  general,  be  a  peri- 
lous proceeding  for  any  undertaking  involv- 
ing large  permanent  investment  and  heavy 
fixed  charges,  as  long  as  prices  of  materials 
of  construction  are  on  an  inflated  basis.  Thus 
does  an  inflated  state  of  prices  tend  to  check 

[36] 


industrial  enterprise  and,  therefore,  to  retard 
industrial  recovery.  More  than  that,  an  in- 
flated state  of  prices  always  adds  to  the  un- 
certainties and,  therefore,  to  the  hazards  of 
business,  when  once  the  crest  of  the  move- 
ment has  been  passed.  Thus  is  a  speculative 
tinge  given  to  even  ordinary  business  in  per- 
iods following  inflation  of  prices  and  credit. 
Such  periods,  it  has  frequently  been  observed, 
tend  to  promote  speculative  activities  and  to 
breed  business  crises.  For  whatever  adds  to 
the  uncertainties  and  hazards  of  business,  not 
only  tends  to  induce  speculation  but  also,  for 
that  very  reason,  to  add  to  the  chances  of 
business  miscalculation  and,  therefore,  to  the 
percentage  of  business  misadventure.  And  it 
is  business  misadventure,  when  the  percentage 
runs  high  enough,  that  makes  for  crisis.  For 
the  business  crisis  is  merely  to  be  regarded  as 
a  rough  and  wholesale  method  of  adjusting 
the  capitalization  of  business  to  the  indubit- 
able facts  of  the  market — through  earnings  to 
prices — when  capitalization  has  gotten  out  of 
line  with  the  price  trend,  the  business  crisis 
being  little  other  than  a  swift  and  violent 
method  of  correcting  errors  of  business  mis- 

[37] 


calculation,  when  such  errors  have  been  ex- 
tensively committed. 

Conclusion 

The  more  the  matter  is  pondered,  there- 
fore, the  more,  I  believe,  the  heart  of  our  na- 
tional after-war  business  and  financial  prob- 
lem will  be  found  in  the  price  situation.  There 
are  many  other  factors — such  as  wages,  taxes, 
interest  rates — ^but  none  that  is  comparable 
in  its  importance  to  the  price  situation  nor 
unaffected  by  it.  If  our  price  situation  is 
quickly  cleared  up  by  deflation,  wages  and 
taxes  may  be  expected  to  adjust  themselves  to 
the  altered  conditions.  Industrial  enterprise 
can  then  make  its  calculations  on  something 
like  a  stable  or  normal  basis  and  the  period 
of  post-war  readjustment  need  have  little 
terror  for  us.  The  whole  world  is  inflated. 
A  great  opportunity,  therefore,  awaits  the 
country  which  is  the  first  to  be  able  to  begin 
marking  down  its  prices  toward  peace  levels. 
The  world  needs  us  and  what  we  can  pro- 
duce. It  needs  copper,  cotton,  steel,  machinery 
and  many  other  things.  Some  of  these  it  will 
take  at  any  prices  but  it  will  take  much  if 

[38] 


our  prices  are  such  as  to  invite  foreign  de- 
mand and  we  need  give  little  attention  to 
artificial  methods  of  taking  up  the  slack  in 
the  labor  market  and  otherwise  stabilizing  in- 
dustrial conditions,  if  we  take  up  promptly 
and  proceed  vigorously  with  the  solution  of 
the  price  situation. 


[39] 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OP  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY    AND    TO    $t.OO    ON    THE    SEVENTH     DAY 


OVERDUE. 


■■A7y 


13    1947 

1 

1 

LD  21-100m-12,'43  (8796s) 

